Highlights

  • SMSFs can invest in a wide range of Assets including shares, managed funds, term deposits, direct property (with conditions), ETFs, bonds, physical gold, and Cryptocurrency — provided all investments pass the sole purpose test.
  • Prohibited investments include assets that provide a current personal benefit to trustees (e.g., residential property leased to family, collectibles stored at home, loans to members).
  • The in-house assets rule limits investments in, or loans to, related parties of the fund to no more than 5% of total fund assets.
  • All transactions must be conducted on arm's length terms — at genuine market prices and commercial rates — to avoid the non-arm's length income (NALI) tax penalty rate of 45%.
  • Collectibles (artwork, wine, rare coins, stamps) can be held in an SMSF but face strict conditions: they must be insured, stored appropriately, and never used or displayed by a related party.

One of the most frequently cited advantages of a self-managed super fund (SMSF) is the ability to invest in a far wider range of assets than most large, APRA-regulated super funds permit. That flexibility is real — but it operates within a clear legal framework that prohibits certain investments outright and imposes strict conditions on others. Understanding the SMSF Investment rules under the Superannuation Industry (Supervision) Act 1993 (SIS Act) is fundamental before making any investment decision on behalf of your fund.

The Sole Purpose Test: The Foundation of SMSF Investment Rules

Direct answer: Under section 62 of the SIS Act, every SMSF investment must be made and maintained for the sole purpose of providing retirement (or death) benefits to members. Any investment that provides a current-day benefit to a Trustee or member — or their family — risks breaching this test, regardless of whether the investment might also be profitable.

The sole purpose test is the master rule against which all other SMSF investment rules are measured. It does not say that an SMSF cannot hold an asset that a trustee personally finds interesting — it says that every investment must be motivated by, and serve, the retirement savings purpose of the fund. An SMSF that buys a beach house and allows trustees to holiday there is almost certainly in breach, even if the property is a good investment on paper.

What SMSFs Can Invest In

Within the boundaries of the SIS Act, SMSFs have considerable investment flexibility. The following asset classes are broadly permissible, subject to the fund's own investment strategy, the sole purpose test, and the other rules discussed in this article.

Australian and International Shares

Directly held shares in ASX-listed companies, or shares in international companies held through a broker, are among the most common SMSF investments. The fund can also invest in Exchange-traded funds (ETFs), listed investment companies (LICs), and real estate investment trusts (REITs) listed on any recognised exchange. All purchases must be on normal market terms — at the prevailing Market Price — and the shares must be held in the fund's name (not in a trustee's personal name).

Managed Funds and Term Deposits

Unlisted managed funds, including wholesale and retail managed investment schemes, are permissible for SMSF investment. Term deposits with authorised deposit-taking institutions (banks, Credit unions) are also popular for Capital-stable, income-focused strategies. These must be held in the SMSF's name and at arm's length (normal commercial interest rates).

Direct Property (Residential and Commercial)

Direct property investment is one of the most popular uses of SMSF flexibility. An SMSF can purchase residential investment property — provided no related party lives in it or leases it — or commercial property, which can be leased to a related party (such as a Business run by a trustee) at genuine market rent. This latter strategy, known as business real property, is one of the most tax-efficient uses of an SMSF for small business owners.

Property can also be acquired using a Limited Recourse Borrowing Arrangement (LRBA), where the fund borrows to buy the property and the lender's recourse is limited to that specific asset. LRBAs add complexity and cost but can allow a fund to access larger properties than its cash balance alone would allow.

Bonds, Debentures, and Fixed Income

Government Bonds, corporate bonds, and listed Debt instruments are permissible SMSF investments. These can be held directly or through bond ETFs and managed funds. The investment strategy should reflect the fund's rationale for holding fixed income, including consideration of Interest Rate risk and the fund's overall Liquidity needs.

Gold and Other Physical Commodities

Physical gold and silver (bullion coins and bars) can be held in an SMSF, provided they are stored securely by an independent Custodian — not at the trustee's home. Gold ETFs (backed by physical gold) are also a common alternative. The fund cannot have informal possession of physical gold at a trustee's residence, as this risks triggering personal-use asset and sole purpose test concerns.

Cryptocurrency

Cryptocurrency (such as Bitcoin or Ethereum) is not prohibited outright under the SIS Act, but it must be held in a manner consistent with trustee obligations. The fund's investment strategy must address crypto as an Asset Class, including its risk profile and Volatility. Crypto must be held in a wallet or exchange account clearly in the SMSF's name — distinct from any personal holdings — and valued at market price for accounting and audit purposes. The ATO has provided guidance on the tax treatment of crypto in SMSFs.

Collectibles With Strict Conditions

Artwork, wine, rare coins, stamps, vintage cars, and other collectibles can technically be held in an SMSF, but the rules under Regulation 13.18AA of the SIS Regulations are deliberately strict. Collectibles must be insured in the fund's name within seven days of Acquisition, stored in a way that does not constitute use by a related party (i.e., not at a trustee's home or place of business), and the storage decision must be documented in the trustee's minutes. They cannot be leased to a related party, and any disposal must be on arm's length terms.

In practice, these requirements mean that collectibles in an SMSF must be stored with an independent art storage Facility, a bonded wine cellar, or similar professional custodian. The trustee cannot display the artwork in their home — not even temporarily. Valuation for financial statements purposes must use a qualified independent valuer.

What SMSFs Cannot Invest In: Prohibited Transactions

Direct answer: The SIS Act prohibits any SMSF investment that provides a personal benefit to a trustee or member today. Key prohibited transactions include: lending money to members or relatives, acquiring assets from related parties (with limited exceptions), and entering into arrangements that are not on arm's length terms.

Loans to Members or Relatives

An SMSF is absolutely prohibited from lending money or providing financial assistance to a member or any of their relatives. This is one of the clearest and most frequently breached rules in the SMSF system. The prohibition is total — there is no exception for 'reasonable' or 'commercial rate' loans. Any Loan of this kind is a strict SIS Act breach, attracting penalties and potentially making the fund non-complying.

Acquiring Assets from Related Parties

An SMSF generally cannot acquire assets from a related party. There are narrow exceptions: listed securities (shares, ETFs) can be acquired from a related party at market price, and business real property can be acquired from a related party at Market Value. For all other assets, the fund must acquire them from unrelated third parties. A common mistake is for a trustee to attempt to transfer a personal investment property into their SMSF — this is generally not permitted.

Residential Property Leased to Related Parties

An SMSF can own residential investment property, but it cannot allow any related party to live in or Lease that property. Related parties include the trustee, any member, and their family members. Even a short-term, informal arrangement — staying there for a couple of weeks while visiting the area — is a breach. This rule applies regardless of whether rent is being paid.

Personal-Use Assets

Assets that are primarily intended for personal use — a boat, a caravan, or holiday equipment, for instance — should not generally be held in an SMSF. While not all such assets are explicitly prohibited by name, the sole purpose test effectively rules out any asset whose primary purpose or use is the current personal enjoyment of a related party.

The In-House Assets Rule: The 5% Cap on Related-Party Investments

The in-house assets rule under Part 8 of the SIS Act limits the amount an SMSF can invest in assets that are related to the fund's members or trustees. Specifically, the market value of in-house assets cannot exceed 5% of the fund's total assets at any time. An 'in-house asset' is defined as a loan to or investment in a related party, or an asset leased to a related party.

The 5% rule is measured at market value. If the fund's in-house assets rise above 5% due to market movements (rather than deliberate investment), the trustees must have a written plan to reduce the in-house asset proportion back below 5% within the year. Business real property leased to a related business is specifically excluded from the in-house asset definition — it is one of the valuable exceptions in the SIS Act.

The Arm's Length Rule and Non-Arm's Length Income (NALI)

Every transaction an SMSF enters into must be conducted on arm's length terms — meaning at genuine market prices and commercial rates, just as two unrelated parties would deal with each other. This includes buying and selling assets, setting rent for a property leased to a related business, and any service agreements with related parties.

Where the ATO determines that income earned by the SMSF is non-arm's length income (NALI) — for example, because a related business is paying below-market rent — that income is taxed at the penalty rate of 45%, rather than the standard 15% or 0% rates. NALI rules were expanded in recent years and now also cover cases where expenses are not incurred on arm's length terms (non-arm's length expenditure, or NALE).

The Investment Strategy Requirement

The investment strategy is the governing document for all SMSF investments. Regulation 4.09 requires it to address risk, return, Diversification, liquidity, the fund's ability to meet its liabilities (including expected pension payments), and whether insurance should be held. Every investment decision should be consistent with the written strategy, which must be reviewed at least annually and updated when circumstances change.

A strategy that simply says 'invest in whatever we want' is not complying. The ATO expects the strategy to meaningfully reflect the fund's investment approach and to demonstrate that trustees have genuinely considered diversification and risk. Failure to have a complying strategy in place is a 20-penalty-unit breach (currently $6,600).

Key Takeaways on SMSF Investment Rules

  • SMSFs can invest in shares, ETFs, managed funds, direct property, bonds, gold, crypto, and collectibles — all subject to the SIS Act's rules.
  • The sole purpose test (SIS Act s62) overrides everything: no investment that provides a current personal benefit to trustees is permitted.
  • In-house assets (loans to or investments in related parties) are capped at 5% of fund assets.
  • All transactions must be on arm's length terms; non-arm's length income is taxed at 45%.
  • Collectibles can be held but face strict storage, insurance, and use rules — they cannot be kept at a trustee's home.
  • The written investment strategy must reflect the fund's actual approach and be reviewed at least annually.